Does Trading With The U.S. Make The World Smarter?

from the St Louis Fed

— this post authored by Ana Maria Santacreu

International technology diffusion determines how fast the world’s technology frontier may grow in the future. It helps explain convergence in income per capita across countries

Channels for Spreading Ideas

Empirical studies have found that international trade of goods and services helps spread ideas around the world.1

International trade could be a direct channel of technology diffusion if, by importing intermediate products from different exporters, the importer benefits from the technology or ideas embodied in those products.

For instance, a firm that imports a machine from a more innovative country may learn from the technology embodied in the production of such machine and may start producing with better technologies.

International trade could also be an indirect channel of technology diffusion. When countries establish bilateral trade relationships, a new form of technology diffusion arises. Through the trade network, importers can learn from new technologies developed by foreign suppliers and vice versa.

More Trade, More Ideas

Therefore, country-pairs that trade more with each other may experience more technology diffusion through both the direct and indirect channels of trade.

One way to determine the strength of the indirect channel is by looking at bilateral royalty payments, or receipts between two countries. Royalty payments represent payments made to the owner of a patent.2

When a domestic firm pays to use a foreign patent, there is diffusion of ideas since the firm is using the technology developed abroad. For that to happen, the domestic firm needs to know about it, of course, which could be facilitated through international trade relations.

The U.S.’s Role in Sharing Ideas

The U.S. is one of the most innovative countries in the world, based on its research and development (R&D) intensity (calculated as R&D expenditures as a percentage of GDP). Hence, it has the potential to be an important source of technology diffusion.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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